Aeropostale Fails in Attempt to End Shareholder Litigation

It was announced on March 25 that Aeropostale Inc. [NYSE: ARO] failed in its attempt to dismiss a lawsuit accusing the clothing retailer of defrauding shareholders in 2011 by hiding problems with excess inventory and slow sales that ultimately weighed on its earnings and stock price. U.S. District Judge Colleen McMahon stated that the lead plaintiff, the City of Providence, Rhode Island, had raised a strong inference that the company and some of its executives knew they were painting a “much rosier picture” than appropriate.

The Plaintiffs stated that as the truth became known, Aeropostale’s stock price dropped more than 50 percent, wiping out about $1 billion of market value, and same-store sales had fallen by a double-digit percentage. According to the lawsuit, Aeropostale had been struggling in 2011 with excess back-to-school and holiday inventory from the previous year, and compounded its troubles by launching unpopular spring and summer clothing lines. But the New York-based company remained publicly upbeat even after entering “full panic mode” in April 2011, with plans for unprecedented promotions and big discounts, the lawsuit said.

Judge McMahon felt that the Plaintiff had sufficiently shown that the Defendants knew they had made a “huge merchandising mistake,” even firing a merchandising director who had demonstrated a “disastrously wrong” fashion sense. “Defendants could see that sales, not just of holiday inventory, but of spring inventory, were poor and getting poorer,” Judge McMahon wrote. “One can infer that Defendants, having access to all this information and watching the downward trend, omitted to disclose all the information necessary to make their statements true and did so either recklessly or consciously – more likely the latter.”

It is likely that the case will now likely proceed to trial. The lawsuit seeks class-action status for purchasers of Aeropostale stock between March 11, 2011, and Aug. 18, 2011. Aeropostale’s stock price fell from $23.05, its closing price at the start of the class period, to a close of $10.71 on the day after the period ended. Judge McMahon gave the Plaintiff 30 days to request class certification.